Vietnam has only 3-5 years left to rely on bank credit: Dragon Capital exec

Vietnam has only another three to five years in which it could continue relying primarily on bank lending to finance economic growth, an executive at fund manager Dragon Capital warned, calling for a major overhaul of the country’s capital market to address a looming funding gap.

Speaking at a conference on restructuring capital channels held on Wednesday, Dang Nguyet Minh, head of research at Dragon Capital VietFund Management (DCVFM), said Vietnam would need an average double-digit GDP growth to achieve its goal of becoming a high-income country by 2045.

That target would require investment equivalent to around 40% of GDP, implying total capital needs of about $1.5 trillion during 2026-2030, double the amount required in the previous five-year period.

“The economy has only about three to five years left in which it could continue depending on the banking system,” Minh warned.

The estimated $1.5 trillion investment requirement is equal to roughly 2.5 times Vietnam’s projected 2025 GDP and four times the size of the country’s current stock market capitalization.

According to Dragon Capital’s calculations, bank credit can only meet around 25-30% of the economy’s funding needs over the next five years, while foreign direct investment is expected to contribute another 15-20%. That would leave an annual financing shortfall of $120 billion to $150 billion that would need to be filled by other sources, including the equity and bond markets.

Vietnam’s credit-to-GDP ratio currently stands at about 146%, lower than Malaysia and Thailand but already above levels seen in several developed economies, including the United States, Germany, and India.

Minh warned that if bank lending continues to grow by 15-16% annually, far above the pace of real economic expansion, Vietnam’s credit-to-GDP ratio would surpass Thailand and Singapore within five years and become one of the highest in Asia, trailing only China, South Korea, Japan, and Singapore.

Excessive dependence on bank lending would raise borrowing costs across the economy, she warned. Corporate funding costs have already increased by around 2-2.5 percentage points since the beginning of the year, with some businesses facing even higher increases.

The pressure is likely to intensify as Vietnam’s banking sector moves closer to international regulatory standards. Banks are required to gradually reduce the proportion of short-term funding used for medium- and long-term lending from 40% to 30%.

“As a result, businesses seeking long-term investment financing from banks will have to accept higher borrowing costs in the future,” Minh said.

Foreign investor paradox

Despite Vietnam’s strong macroeconomic fundamentals, foreign investors have continued to pull money out of the country’s stock market.

Minh said Vietnam remained one of the region’s most attractive investment destinations, citing projected GDP growth of 8.5% this year and forecast corporate earnings growth of 23% in 2026 despite global supply chain disruptions, trade tensions, and geopolitical uncertainty.

She also highlighted administrative reforms, favorable demographics, the expansion of the middle class, and the country’s progress toward emerging-market status as key strengths.

Nevertheless, foreign ownership has fallen sharply. Overseas investors currently account for only about 12% of market capitalization by value, roughly half the peak level recorded in 2016.

Although net foreign outflows have also affected other Southeast Asian markets, including Indonesia, Malaysia, Thailand, and the Philippines, the pace of withdrawals from Vietnam has been more pronounced.

Minh said the problem stems from structural imbalances on both the supply and demand sides of the market.

On the supply side, the composition of listed companies has changed little and remains heavily concentrated in financial institutions and real estate developers. The combined market capitalization of those sectors has risen from 56% in 2020 to 64% currently.

Meanwhile, manufacturing and services, two of Vietnam’s key economic strengths, account for only a small share of the market. Despite the country’s emergence as a global manufacturing hub and a major recipient of FDI, industrial companies represent only around 15% of total market capitalization.

“Foreign investors like Vietnam’s macro story, but they struggle to find suitable investment opportunities in the market,” Minh said.

The lack of large listed technology and advanced manufacturing companies is increasingly at odds with global investors’ preference for technology-related assets.

Domestic institutional capital remains underdeveloped

Dragon Capital also pointed to the limited size of domestic institutional investors.

Assets managed by domestic investment funds amount to only around $32 billion, equivalent to about 6% of GDP and significantly lower than levels seen in many peer economies. Open-ended equity funds account for less than 1% of the total stock market capitalization, while voluntary pension funds manage just $81 million.

The absence of stable, long-term domestic capital has left Vietnam’s market dependent on episodic inflows rather than steady investment, leading to a situation where the benchmark index may remain resilient while many individual stocks continue to decline in value.

Minh called for a restructuring of both the supply and demand sides of the capital market.

On the supply side, Vietnam needs more high-tech companies and faster equitization of state-owned enterprises to increase free-float and improve market quality.

On the demand side, policymakers should promote the development of domestic investment funds, securities companies and asset managers to create a deeper pool of long-term capital.

“If we can solve these two fundamental issues, Vietnam will not only grow faster but also achieve more sustainable development in the next economic cycle and growth era,” she remarked.